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Severance Practices in Canada: Survey Results and Legal Tips
- 1. November 27, 2014 Terminal City Club Severance Practices in Canada: Survey Results and Legal Tips
- 2. Agenda • Trends in restructuring • Current developments in terminations, severance and career transition • Legal considerations and best practices including: • Severance format options: pros and cons • What the law requires employers to include in severance packages • How to secure additional protections such as non-competes as part of severance 2
- 5. Workforce Changes – Past and Future • Past - 87% reported employee terminations same as or higher than previous 12 months • Future - 78% reported employee terminations same as or higher in the coming 12 months 5
- 6. Reasons for Change 6 Previous 12 Months 1. Organization Structure Change 59% 2. Individual Performance 58% 3. Business Strategy Change 29% 4. Financial Reasons 28% Coming 12 Months Pretty much the same…
- 7. Termination Planning – Large Downsizing 60% have a detailed plan for large downsizings (28% have broad plan) • Ideal amount of time for planning is more than a month Common reasons for insufficient project planning… it’s a 3 way tie • Not enough time • HR told too late • Too many priorities • an aside… 20% cited Inexperienced Management 7
- 8. Termination Planning – Individual 58% have a detailed plan for individual terminations (39% have a broad plan) • Ideal amount of time for planning is a week or more • Even a week isn’t always possible, so HR needs to be ready with established processes, templates, etc. 8
- 9. Severance Structure Exec Mgt Prof Other* Lump Sum 65% 66% 63% 59% Full salary continuance to end of severance period (no claw back) 29% 27% 20% 16% Salary continuance with partial payment of balance upon new job 14% 17% 13% 8% Salary continuance stops upon new job 6% 6% 6% 5% Mix/choice of lump sum and salary continuance 19% 17% 12% 7% 9 *Support, Hourly or Union Employees
- 10. Typical Severance Per Year of Service Exec Mgt Prof Other* 1 week 4% 8% 12% 28% 2 weeks 5% 15% 30% 45% 3 weeks 9% 29% 33% 19% 1 month 63% 44% 23% 8% More than 1 month 19% 4% 2% 0% 10 *Support, Hourly or Union Employees
- 11. What do Top Employers do Differently? • Detailed plan for large downsizings (77%) • Follow established process for individual terminations • Severance Packages: More likely to include benefits continuation Use non-compete and non-solicit clauses Provide Career Transition support 11
- 12. Client Examples International telecommunication company • Dedicated resources • Detailed project plan • Seek out external support BC-based tech company • Detailed schedule • Employee choice • Employees re-join 12
- 13. Why Career Transition Support? Top Reasons Cited: 1. Right thing to do - 67% 2. Terminated employees to receive job search skills (to land another job faster) - 59% 3. Send a positive message to remaining employees - 48% 13
- 14. Career Transition Support Criteria used to decide length of career transition support: 1. Job Level - 66% 2. Length of service - 51% 3. Age of the employee - 43% 4. Expected difficulty of job search - 41% 14
- 15. Career Transition Support Criteria used in choosing a career transition provider: 1. Quality of Consultants - 95% 2. Quick Response Time - 91% 3. Program Features - 87% • Ability to customize 15
- 16. Terminations – Best Practices Questions to ask: •Is my employee being treated with care and respect? •Has the process been thoughtfully planned and skillfully conducted? •Have I done what I can to preserve my company’s reputation? •Have my company’s legal and ethical responsibilities been fulfilled? 16
- 17. November 27, 2014 Terminal City Club Severance Practices in Canada: Survey Results and Legal Tips
- 18. 18 Introduction We will cover: A. Why consulting legal counsel pre-termination can save you money B. The pros and cons of various severance formats C. What you need to include in severance packages besides salary D. How to secure additional protections
- 19. Why Consult Legal Counsel before Termination • Why Consult Legal Counsel before Termination • High Risk Circumstances for Termination: A lawyer can help identify high risk terminations and recommend alternatives, e.g.: • Employee on or returning from maternity leave • Employee being terminated for misconduct related to a substance addiction • Employee being terminated for lengthy absence on sick leave 19
- 20. Why Consult Legal Counsel before Termination • Better understanding of severance liability: Allows you to properly budget for the cost and avoid upsetting an employee with a low-ball offer • Further Warnings: Where terminating for cause, you may need to do further warnings • Checking for existence and and/or validity of termination clause • A few hundred dollars of advice in advance can avoid tens of thousands of unplanned severance liability 20
- 21. Pros and Cons of Severance Formats • Lump Sum • Pros • Is preferred by most employees • Allows for a “clean break” • Employers can usually settle for a lump sum which is 66% - 80% of estimated Reasonable Notice Period (“RNP”) N.B. Note under recent case law, termination clauses calling for “notice or pay in lieu” have been interpreted as calling for a lump sum payment 21
- 22. Pros and Cons of Severance Formats • Lump Sum • Cons • Can over compensate employees who re-employ early • In some organizations, lump sum severance cannot be combined with pension and benefit accrual • Imposes heavy cash-flow hit up front without creating any incentive for employee to honour post-employment obligations 22
- 23. Pros and Cons of Severance Formats • Continuation with no Clawback on Re-Employment • Pros • Spreads cash flow impact • Can more easily be linked with pension and benefit continuation • Can still be discounted from estimated reasonable notice • Creates an incentive for employee to comply with post-termination obligations 23
- 24. Pros and Cons of Severance Formats • Continuation with no Clawback on Re-Employment • Cons • ESA minimums need to be paid up-front in lump sum with payroll then re-activated • Involves longer administration of severance • Less popular with employees • If pension and benefits continue, payments not eligible for rollover to RRSP 24
- 25. Pros and Cons of Severance Formats • Continuation with Clawback on Re-Employment • Pros • Creates the opportunity to save on severance costs if employee re-employs early • Same as for continuation without clawback • Cons • Case law says such offers must be “at the high end of the range” • There is currently no practical way to monitor the employee’s job search efforts • Many employers report employees always draw entire severance 25
- 26. What Needs to be Included in Your Severance Package beyond Salary? • If there is a termination clause, what needs to be included should be defined in the clause: • If clause calls for “notice or compensation in lieu” the general rule that all components of compensation package over the notice period must be included • Some clauses will say “salary only” 26
- 27. What Needs to be Included in Your Severance Package beyond Salary? • If no termination clause, covering what needs to be included, courts require continuation or compensation for all elements of compensation package over RNP. This will include: • Group benefits coverage • Beware of potential employer liability for life and disability coverage • Pension Accrual or Employer RRSP contributions • Car allowances, but only to the extent they are a taxable benefit 27
- 28. What Needs to be Included in Your Severance Package beyond Salary? • Commissions and Bonus: • Check plan terms and any Employment Agreement to see if liability is excluded • The courts require very clear language to avoid liability • A requirement to be “actively employed” is generally considered satisfied during the RNP • To avoid liability, plan must exclude entitlement on date of receipt of notice of termination or explicitly rule out any period of non-worked notice • Even “discretionary” bonuses can sometimes be awarded • Stock Options: Unless the Stock Option Plan or Agreement is very explicit, courts will generally deem vesting to continue over the RNP 28
- 29. How to Secure Other Protections as Part of a Severance Package • The survey tells us that as many as 50% of employers want non-compete covenants for Executives and Managers: • Step One: Check if employee has already signed non-compete/ solicit/confidentiality covenants (“NCA”) • If so, have your lawyer check that the clause is at least potentially enforceable (there are no guarantees) • If it is not, consider substituting a more limited but more enforceable covenant 29
- 30. How to Secure Other Protections as Part of a Severance Package • Step Two: If no NCA has been signed, realistically you will have to offer additional compensation • Step Three: Draft severance offer to: • Explicitly offer separate compensation for the NCA • Make severance payable in continuance format to incentivize compliance • Pay extra compensation for NCA at the end of the period of protection under the NCA N.B. Normally it is possible to include a confidentiality covenant without paying additional compensation 30
- 31. Conclusion • Good legal advice pre-termination can help you: • Select the optimal severance format • Include all required forms of compensation • Secure additional covenants to ensure a successful termination 31
- 32. Thank You J. Geoffrey Howard, Partner Gowlings Tel: 604-891-2279 Email: geoffrey.howard@gowlings.com Michael Shalke, Associate Gowlings Tel: 604-891-2282 Email: michael.shalke@gowlings.com Peter Saulnier, Partner Logan HR Tel: 604-687-8607 Email: peter.saulnier@LoganHR.com Liz Grant, Senior Consultant Logan HR Tel: 604-687-8607 Email: liz.grant@LoganHR.com montréal · ottawa · toronto · hamilton · waterloo region · calgary · vancouver · beijing · moscow · london
Editor's Notes
- Welcome & Introductions… Peter Saulnier, Partner LOGAN HR Liz Grant, Senior Consultant LOGAN HR Geoff Howard, Partner Gowlings Michael Schalke, Associate, Gowlings
- Only study of its kind in Canada
- Thanks very much Geoff, it’s my pleasure to be able to share with you some of the statistical data that emerged from the survey… fair warning I will be sharing a fair amount of data and in case you miss any and would like the details, all the information is in the report that’s available to you at the end of today’s session. Once I provide you with an overview of some of the preliminary data, I’ll turn things over to Peter who will walk you through the survey findings on Severance Practises, What Top Employers Reported to do differently and lastly why and when those surveyed utilized Career Transition Support. The National Verity Filion Partnership conducted this online survey on Termination and Severance Practices between July and September of this year. We had a total of 290 organizations participated from across Canada. All Stats Canada industry categories were represented, with the top industries being: Financial, Insurance & Real Estate Manufacturing Tie for third: High Tech, and Professional Services The organizations surveyed operate in all Provinces and the Northern Territories. The survey was sent to a broad array of organizations and not just our clients. We had a very good response rate and it’s clear by the number of attendees at today’s session that the topic is of interest to organizations today. It’s important to note that ¼ of the participants indicated that they had received a Top Employer recognition within the past 2 years. Peter will be walking you through the findings of what Top Employers reported to do differently from the broader sample. Good distribution of organizations size (see over)…
- Just over half of the surveyed organizations have between 101-2000 employees you’ll see those organizations represented in the bottom half of the pie graph. In the light blue on the top right, you’ll see that quite a few in the less than 100 category, and similarly quite a few having between 2,000-10,000 indicated in black. The largest organizations surveyed reported having over 50,000 employees Interestingly, while we found some statistically significant differences in what Top Employers did compared with the general survey findings, there were no obvious differences in practices by size of organization.
- We asked participants the question “over the past 12 months, how has the number of employee terminations in their organizations changed”… and as you’ll see 87% of respondents reported having the same or higher numbers of terminations. In general and in our experience, termination numbers have been higher in recent years than historically and over the last 12 months terminations have remained at these same high levels or have been even slightly higher, which may suggests the economic recovery hasn’t really taken hold yet or that the rate of organization structural change continues at a rapid pace. When asked about what was anticipated in terms of termination numbers in the coming 12 months respondents indicated that they expect roughly the same generally high levels or slightly lower, as you’ll see by the 22% lower / significantly which suggests a level of moderate optimism, but world’s economy as it is, rate of change in the of business…. only time will tell.
- Respondents were asked to select from a list the top main causes for changes in the number of employee terminations for the previous 12 months and as you’ll see Organization Structure Change was the top reported reason at 59%, followed closely by Individual Performance at 58%. Both Business Strategy Change and Finance we’re also cited at 29 and 28% respectively. When respondents where asked what will drive these changes in the coming year, the reasons are pretty much the same. A couple of observations based on our experiences… firstly, it’s possible that the low performing employees is under-reported, as often they’re the first to be selected as part of larger downsizing. And secondly….with good legal advice from your Gowlings labour lawyer…. It’s our observation based on recent trends where seeing with our clients, that employers are feeling more comfortable and confident in termination for performance reasons…. And not masking or hiding under the guise of larger scale downsizing or organization restructuring. We might further surmise that if we went back over the last few years the 58% for Individual Performance has been steadily climbing and will continue to climb.
- We also asked a series of questions on termination planning processes both for large downsizing initiatives and individual, one-off terminations and here’s some of that findings… 60% of respondents reported having a detailed plan for large downsizings and in terms of definition that included having tasks identified, responsibilities and timing assigned, and a communication plan in place. A further 28% reported having a more broad, general plan. So if you do the math…that means 12% of respondents reported having NO plan in place for large downsizing… an approach we would definitely not encourage!! We also asked about how much prep time companies actually had… versus what was ideal for planning large scale projects… 34% indicated having 2-months planning time while 42% indicated the ideal was to have MORE than 2 months so there appears to be a discrepancy between the amount of actual time versus idea in planning. As an aside … 15% of respondents indicated having less than 2 weeks to plan a major downsizing. Again, not a practice we’d encourage! So the common reasons for insufficient project planning, well it was a 3-way tie… Not enough time HR told too late Too many priorities An aside… 20% cited Inexperienced Management. As far as this last point goes, this is what the data tells us, although we don’t really know what’s being implied here… is it incompetent managers… or maybe a reflection of younger less experience managers that simply don’t have the experience of managing a large-scale downsizing, we simply don’t know… On a separate note, when asked what external resources and support organizations use to assist with planning a downsizing, 61% reported seeking Legal Advice and 65% Career Transition…. And in our humble opinion we think both should be higher. Peter and Geoff & Michael will be speaking more about this shortly.
- We also asked questions on termination planning processes for individual or one-off termination 58% reported having a detailed plan for individual terminations and interestingly 39% having a broad, general plan, for a total of 97% that have some sort of plan/process in place If we compare that data to the previous slide where 88% of respondents having some form of plan for large downsizings it suggests that at least with the organizations, companies are better prepared to manage one-off terminations versus larger downsizings we can guess that this because large downsizing are less frequent. In terms of timing, ideal amount of time for planning for a terminations is a week or more, although in our experience a week isn’t always possible, so HR needs to be ready with established processes, templates, etc. I’m going to turn things over to Peter who will walk us through the survey data on Severance Structure, What Top Employers Reported to do differently and the survey findings on Career Transition Services. Over to you Peter….
- Results seem to indicate that there’s a growing preference towards lump sum payments across all levels in organizations. In our observation this is a trend we’ve seen amongst our clients and the data appears to support that… we will however, defer to our legal colleague for more on that…. In our observations, we’ve seen decline in the use of claw back provisions in severance arrangements. Most common claw back is 50% payout of residual/balance according to the data. Non-competes and non-solicits are often included in severance packages. 94% of those surveyed required employees to sign a formal release in order to receive their full severance. Most organizations include Career Transition services as part of their severance packages, roughly ¾ of respondents providing at the Professional, Management and Executive levels.
- Here’s the data - 2 weeks for others, 2 – 3 weeks for professional, a month per year for managers and surprising to us is a month per year for executive ADD GRAPH OF QUESTION 21
- As compared to 60% overall response for having detailed plan. In our experience, being onsite with our clients, we can tell when there is an established plan, we see things go more smoothly, and in general terms we see a much better outcome, including less confusion day of, preserving dignity of the indiv, less impact on remaining employees as a result of good communication, e.g. who needs to hear the news in person, which external stakeholders need to be told, etc. All at the right time according to a plan. And the key in our experience is a very detailed plan. Follow established process for indiv terms too. As we say data, we conclude that top employers have a detailed plan for large downsizing because they take the time to prepare one, its not that they downsize more its that they take the time to prepare. Severance Packages… More likely to include benefits continuation; and Half or more continued benefits for the duration of the severance period. Non-compete and non-solicits 85% for execs for CT!.... And 81% for managers, and slightly less for professional and others.
- International, multi-location telco 3,600 ees; 7 locations across N America; all impacted on the same day at the same time. Townhalls to deliver the news simultaneously across 5 different time zones. Large, complex. Dedicated resources within client org and external. Dedicated executive sponsor. Seek out external support Communications firm Legal CT Security Detailed complex project plan. HR at the table early in the planning process End result: played out seamlessly, and no hit to company brand (share price). BC based tech company Employee choice – leaving premises Detailed schedule and plan They hire people back and people go back because they are a speciality employer – experience is positive…
- Right thing to do – still care… Corporate social responsibility Best practices on the use of LinkedIn and other social media in job search… Positve message… Taking care of my former colleagues; what if it’s me next time – that’s their first reaction – CT addresses this very real concern. Other common reasons cited included legal risk mitigation (maybe its not higher because they have already got good legal counsil) and org brand image
- Much like the criteria that you will use in calculating severance amounts with your legal counsel, transition support should line up… Expected difficulty of job search for example a specialized or obsolete skill set, health concerns or challenges (for example blind or deaf). Criteria type / length Typical programs….
- CT services are included in the majority of termination packages with approx. ¾ of participating orgs using these services at the Manager level. While programs are typically smaller for unionized employees, many orgs include CT services for these individuals as well (… often in the form of workshops??_ While 94% of participating organizations require terminated employees to sign a release in order to receive their full severance, only a very small number required terminated employees to sing the release in order to start their CT services. This is likely because there are obvious advantages to assisting terminated individuals with a successful job search as soon as possible, allowing them to put energy towards their future, rather than dwelling on the past.
- Employee is treated with care and respect, retains dignity, is clear on next steps and gets home safely. and are they clear on next steps for example I’ve heard the story of an employee returning to work the next day as the messaging was unclear Company internal and external reputation is preserved. Process is thoughtfully planned and skilfully conducted. Company legal and ethical responsibilities are fulfilled. ------------------------------------------------------------------------------------------------------- Hardcopies available on the front desk as you leave, or we can email to you if you want. Give your email address to Laura – stand and wave….. ***We have a termination guide book that we can email to you.*** INTRO GEOFF AND MICHAEL
- Welcome & Introductions… Peter Saulnier, Partner LOGAN HR Liz Grant, Senior Consultant LOGAN HR Geoff Howard, Partner Gowlings Michael Schalke, Associate, Gowlings